The Return of Thrift: How the Coming Collapse of the Middle-Class Welfare State Will Reawaken Values in America. - book reviews

Reason, August-Sept, 1996 by Susan Lee

Let me say it straight out: This is a book at war with itself. Phillip Longman manages to argue that an overactive government is both the cause of and the solution to the financial mess we are fast approaching. Unfortunately, his solution is so bad that, in the end, it overpowers his good exposition of other matters.

Most of The Return of Thrift: How the Coming Collapse of the Middle-Class Welfare State Will Reawaken Values in America is descriptive. Longman, a prize-winning journalist who has written on Social Security, runs through the history of how the age of entitlement was born, what specific government programs Americans have become "addicted" to, and the nature of the coming financial crunch, when claims on government revenues will far exceed its call on resources.

Although this territory is familiar to anyone who has even the faintest understanding of domestic economic policy during the past 40 years, Longman's discussion works to remind us of how far we've traveled down the path to a middle-class welfare state. During the Great Depression and even up to the 1960s, he notes, Americans considered it humiliating to receive help from the government. But today, Longman points out, over 50 percent of all U.S. households contain at least one person who receives a direct entitlement benefit from the government: veterans or Social Security pensions, unemployment compensation, or disability payments. These benefits add up to $750 billion, or more than half of the total federal budget. At any given time, 30 percent of the U.S. population is eating up indirect benefits - those expressly designed to subsidize an anointed group such as homeowners, farmers, or senior citizens - that the government delivers through loopholes in the tax code.

Worse, these benefits, which are often characterized as aid to underprivileged or needy citizens, are mostly enjoyed by the middle class. Of the trillion-plus dollars the United States spends each year on direct and indirect entitlements, only a tiny fraction actually goes to poor people.

Such information is, of course, not exactly news. Nor is it news that this situation cannot continue without impoverishing today's workers, who are subsidizing the consumption of today's retirees, rich and poor alike, through Social Security, Medicare, and even to some extent the underfunded private pension system. This overwhelming burden - the product of early retirement, advancing life expectancy, and fabulously generous benefits - has never been so onerous. Indeed, today's workers are caught in a no-win situation. Not only will they be unable to pass "go" and collect their own largess, they will either have to save privately to make up for zeroed-out government benefits or have to pay higher and higher taxes to keep the programs going.

Longman offers separate chapters on the development of some of these entitlement programs. The list includes Social Security, Medicare, housing subsidies created by the mortgage-interest deduction, pensions for civil service and military employees, and the underfunded private pension system. The last is relevant because some of the nation's largest corporate pension plans receive government subsidies. These plans, called "defined benefit" plans because the benefits are fixed, get federal tax subsidies and free federal insurance.

It all adds up to a dreary story. But after telling it, Longman holds out some hope that the eventual collapse of the middle-class welfare state will trigger a cultural revolution in which the bourgeois values of thrift, work, and limited government will reassert themselves.

Up to that point, it all sounds sensible. But then Longman offers an answer that is utterly incongruous with his discussion. He proposes, of all things, that the government step in to run a complicated system of reduced entitlement benefits, and compulsory savings. Simply put, Longman's return to thrift involves more government programs.

The return to governmental thrift would be administered under what Longman calls a "global means test," which would take back entitlements according to a progressive formula. For every $10,000 in income above $40,000, families would surrender 10 percent of the direct and indirect benefits that cause their income to exceed $40,000. In an apparent attempt at consistency, Longman suggests that the bookkeeping nightmare this would surely become should be administered through that nightmare agency, the Internal Revenue Service.

As for boosting savings, Longman argues, "If we can mandate an increase in the minimum wage, we can mandate an increase in the savings rate as well, and we should." This would be achieved with a federal law that required individuals to save a set amount toward retirement, with richer people compelled to save more of their income than poorer ones. (Again, the IRS would function as chief enforcer.)

The cognitive dissonance between Longman's description of the coming crisis and the solution to it will leave the reader gasping. The basic problem with our economic life is not that we have too little government interference but that a hyperactive government has taken away our freedom to make decisions, has insulated us from the risk-taking - with its consequences - that these decisions necessarily involve, and hammers the successful members of society through redistributionist tax schemes.